The concept of money illusion, a recently resurrected phenomenon of behavioral economics, is a real fact of economic life, the potential role of which should no longer be dismissed. Despite money illusion being utterly suppressed by mainstream economists, small deviations from rationality, together with trends in behavioral economics, alleviate the denial of money illusion induced by the rational expectations revolution. This book argues that money illusion seems to be a ubiquitous phenomenon, affecting various areas such as financial markets, housing markets, labor markets, consumption-saving decisions, and even development at the aggregate level induced by coordination issues. Furthermore, in light of the educational efforts of central banks and other institutions, it is worth considering whether solid economic training would provide guidance for the public regarding their decision-making and thereby alleviate the effects of money illusion. The emerging field of experimental economics provides a unique opportunity for us to verify the presence of money illusion. Specifically, attention is devoted to the experimental investigation of reduction in the direct and indirect effects of money illusion with respect to the level of economic literacy acquired through economic education.
Economic Literacy and Money Illusion will be of interest to the general audience and to those who are interested in behavioral economics, economics education, and experimental economics, as well as to policy makers and institutions. Last but not least, it will help develop students’ interest in alternative economic theories.
NB. The research and writing of this book was made possible with the support of the University of Economics, Prague, Faculty of Economics, Department of Economics.
Table of Contents
List of figures
List of tables
1 Early theorizing about money illusion
2 Rejection of money illusion
3 Renewal of interest in money illusion
4 The money illusion and its applications
5 Economic literacy and money illusion
6 Economic literacy and money illusion: An experimental approach
7 Experimental results
Helena Chytilova is Assistant Professor at the University of Economics, Faculty of Economics and Charles University, Faculty of Law, Prague, Czech Republic.
'Money illusion has been a non-starter among academic economists for a long time. It has been thoroughly banned from the economists’ research agenda with the advent of the rational expectations revolution in the 1970s. Back then, it was a matter of principle to account for all economic phenomena, including macroeconomic ones, by assuming that all agents are fully rational and that all agents know that everyone else is fully rational. Fortunately, those days are over in most quarters of the profession. With the emergence of behavioral and experimental economics as a field in the last two or three decades, economists have started to rediscover their fascination with the topic and have started asking systematically when money illusion matters, and if so, why.
Helena Chytilova’s timely book recounts the remarkable academic journey of the concept of money illusion and she contributes to a currently hot topic in research by taking stock of the relevant literature in this emerging field. Importantly, she provides new experimental evidence suggesting that money illusion matters for nominal inertia even if the decision makers involved are economically literate, i.e. have undergone solid training in economics. This finding is intriguing as it seems to imply that economic training alone will not necessarily be a safeguard against the economic harm potentially caused by money illusion.' — Jean-Robert Tyran, Professor of Economics, University of Vienna, Austria